Portfolio Update

After months of rhetoric and speculation regarding U.S. tariffs on imports from Canada, Mexico, and China, President Trump officially implemented a 10% tariff on Chinese imports on February 5^th—significantly lower than the initially proposed 60%. Meanwhile, despite multiple announcements made by Trump regarding the imposition of 25% tariffs on Canada and Mexico, both have been temporarily suspended for 30 days, as of February 4th. The potential implications of these measures on the Canadian economy are examined in detail in our analysis, US Tariffs on Canadian Trade.

While trade policy remains a key consideration, equity markets have been shaped by a range of factors, including shifts in investor sentiment across high-growth sectors as well as an excessive degree of optimism in earnings forecasts for certain pockets of the market. Global equity markets began the year with positive momentum, though volatility resurfaced toward month-end following an AI-driven sell-off in selected technology and power generation stocks. DeepSeek, a Chinese AI startup founded two years ago, released its open-source model and announced it had been developed at a fraction of the cost incurred by leading U.S. technology firms. The news prompted investors to reassess the sustainability of the assumed dominance and valuation premiums assigned to many mega-cap AI-related companies that have been largely driving equity market performance. A shift in investor sentiment contributed to a 17% decline in Nvidia’s share price, erasing nearly US$600 billion in market capitalization—the largest single-day loss in U.S. equity market history. While it may be too early to determine if a sustained correction in AI-related stocks has begun, this highlights the risks associated with market concentration and stretched valuations.

Adjusting Cash Exposure in Response to Valuation Peaks

As equity markets recorded two back-to-back years of double-digit gains, some of our holdings reached or exceeded our assessment of their intrinsic value. Against this backdrop, we actively reduced our exposure and/or exited several positions in the portfolio.

Our cash levels have therefore increased in most of our strategies. We believe that this provides us with greater flexibility to deploy capital opportunistically as we navigate a potentially more turbulent environment.

A portion of the liquidity has been reallocated to government bonds within balanced mandates, allowing us to preserve capital while awaiting more attractive equity market entry points. We continue to view equities as offering superior risk-reward potential over the medium- to long-term. However, we view the risk-reward differential between both asset classes as having recently narrowed. With policy rates in Canada declining, allocating a portion of raised cash to short- to medium-term government bonds has allowed us to lock in additional yield without taking on undue risk while awaiting opportunities to redeploy into equities. We continue to remain cautious of the risks posed by elevated valuations. The current environment calls for a careful balance—seeking attractive opportunities while avoiding the risk of overpaying for assets.

Selective Profit-Taking: Realizing Value from Key Holdings

The sales we have undertaken in our equity portfolios have generally been spread across various industries. However, two notable examples tied to the boom in AI are worth highlighting. We crystalized substantial gains in Celestica, a position initially established in 2007. At the start of 2023, Celestica represented approximately 3% of our Canadian portfolios, making LetkoBrosseau the largest shareholder of the company at that time. Since then, the company has produced a cumulative total return of nearly 780%, ranking among the top-performing stocks in the S&P/TSX Composite Index for the last two consecutive years. However, as the sector began to face increasing competition and margin growth pressures, coupled with Celestica’s valuation reaching over 18 times forward price-to-earnings—well above its historical average of 7 times—we concluded that the company had exceeded our intrinsic value estimates. As a result, we prudently began reducing our exposure in mid-2023 and fully exited the position this January.

We also realized profits on Capital Power, a North American power generation company in the utilities sector that operates 32 plants. Since 2014, the company has tripled its capacity, with 75% of its earnings before interest, taxes, depreciation and amortization (EBITDA) contracted under power purchase agreements (PPAs), providing stable cash flows. The company’s stock price more than doubled, rising from $31 in April 2024 to $65 in December 2024, fueled by announcements made by the company that it is in discussions with hyperscalers and data centres to contract out its spare capacity in Alberta. Given its stretched valuation of 20 times price-to-earnings, we further trimmed our position, locking in profits near the share price peak. Capital Power was caught in the broader AI-driven sell-off at the end of January, resulting in a pullback in the company’s share price. Despite recent volatility, we remain constructive about the company’s future growth potential.

Concluding Thoughts

We continue to focus on high-quality businesses trading at reasonable valuations, guided by a disciplined approach to capital allocation. In our view, earnings forecasts for certain companies reflect an excessive degree of optimism, and the added uncertainty surrounding proposed U.S. tariff policies further reinforces the need for caution. As a result, we have trimmed and/or exited positions where valuations appear stretched and allowed cash levels to rise, reflecting our view that certain holdings are trading near peak valuations. While market volatility and elevated valuations persist, we are patient in our pursuit of value, ensuring that capital is deployed thoughtfully and opportunistically. Our equity portfolios remain reasonably valued, trading at a forward price-to-earnings multiple of 12.0x.